Bank lending slows due to drop in demand

MANILA, Philippines – Despite monetary easing by the Bangko Sentral ng Pilipinas (BSP), bank lending is slowing down because few companies actually have the appetite for bank loans and demand would not recover until the economy bounces back.

But BSP Governor Amando M. Tetangco Jr. said this did not mean the central bank would stop monetary expansion unless it is beginning to affect inflationary expectations.

“Maintaining an expansionary monetary policy stance to the extent that the inflation outlook allows, could support market confidence,” Tetangco said. “It would assure households and businesses that risks to macro-stability are being addressed decisively.”

The slowdown in bank lending has been one of the clear indications that monetary policy easing is doing little to spur economic activities and central bank officials said there was only so much that providing liquidity could do.

Tetangco said the BSP has been trying to ascertain whether the slowdown in lending is an indication of declining demand for funds.

“The slowdown in lending may be more demand-driven than supply-constrained,” Tetangco said. “Weaker economic activity, particularly in credit-intensive sectors such as manufacturing, would certainly contribute to reduced demand for loans, particularly if firms are running down their inventories and postponing their expansion plans.”

On the supply side, Tetangco said the banks’ generally cautious attitude toward lending could possibly temper loan growth. Based on the BSP’s recent survey of senior loan officers, he said banks have indeed turned cautious in their lending.

“As I said, there are pluses and minuses and where the chips finally fall is a numbers game – but we are hopeful that there will continue to be reasonable credit growth going forward,” Tetangco said.

But Tetangco said recovery would come as soon as confidence recover from its current slump.

“As the current financial crisis has been primarily a crisis of confidence, recovery will also be driven by improvements in consumer and business confidence,” Tetangco said. “Any recovery in global demand will greatly influence the recovery process.”

“Overall, any real economic growth momentum would have to be a careful balancing of growth drivers from both external and domestic demand,” he added. 

Tetangco said counter-cycilcal support to aggregate demand in the form of expansionary fiscal and monetary policies, along with strong policy actions to ensure financial and corporate sector health could contribute to faster recovery.

Aside from continued monetary expansion, Tetangco said another way to support recovery would be through a greater spending on public and social infrastructure.

“There is also a need for more investment in education and social safety nets to give consumers the confidence to spend,” Tetangco added. –Des Ferriols, Philippine Star